Common Stocks and Uncommon Profits and Other Writings

 
Origins of a Philosophy 
2 3 3 

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stocks that “were still cheap” and were worthwhile investments because 
“they had not gone up yet.”As a result of the small profits from the tiny 
amount of stock transactions a few years back and the saving of a good 
part of my salary, plus some money I had earned in college, I managed 
to scrape together several thousand dollars as 1929 went along. I divid- 
ed this almost equally among three stocks which, in my ignorance, I 
thought were still undervalued in that overpriced market. One was a 
leading locomotive company with a still quite low price-earnings ratio. 
With railroad equipment being one of the most cyclical of all industries, 
it takes very little imagination to see what was to happen to that com- 
pany’s sales and profits in the business depression that was about to 
engulf us. The other two were a local billboard company and a local 
taxicab company, also selling at very low price-earnings ratios. In spite 
of my success in ferreting out what was going to happen to the radio 
stocks, I just did not have the sense to start making similar inquiries 
from people who knew about these two local enterprises, even though 
obtaining such information or even getting to meet the people who ran 
these businesses would have been relatively simple, since they were close 
at hand. As the depression increased, I learned rather vividly why these 
companies had been selling at such low price-earnings ratios. By 1932, 
only a tiny percentage of my original investment was represented by the 
market value of the shares in these companies. 
THE GREAT BEAR MARKET 
Fortunately for my future well-being, I have an intense dislike for los- 
ing money. I have always believed that the chief difference between a 
fool and a wise man is that the wise man learns from his mistakes, while 
the fool never does. The corollary of this is that it behooved me to go 
over my mistakes pretty carefully and not to repeat them again. 
My approach to investing expanded as I learned from my 1929 mis-
takes. I learned that, while a stock could be attractive when it had a low
price-earnings ratio, a low price-earnings ratio by itself guaranteed
nothing and was apt to be a warning indicator of a degree of weakness
in the company. I began realizing that, all the then current Wall Street 
opinion to the contrary, what really counts in determining whether a 
stock is cheap or overpriced is not its ratio to the current year’s earn-
ings, but its ratio to the earnings a few years ahead. If I could build up